New rules for nonresident aliens and foreign entities published by the IRS

The IRS has updated and revised Publication 515 (Withholding of Tax on Nonresident Aliens and Foreign Entities) and Publication 519 (US Tax Guide for Aliens). The new rules applicable to US nonresident aliens and foreign entities for 2013 are summarized below.

  1. Deposit interest. Beginning in 2013, information reporting has been extended to interest earned by residents of other foreign countries. Deposit interest of $10 or more paid to any nonresident alien (NRA) individual who is a resident of a foreign country with which the United States has agreed to exchange tax information pursuant to an income tax treaty or other convention or bilateral agreement, must be reported on Form 1042S. This is a low reporting threshold for payors of deposit interest.
  2. Obligations in registered form. Portfolio interest includes interest paid on an obligation that is in registered form. Interest and original issue discount that qualifies as portfolio interest is not subject to NRA withholding. The rules for determining whether interest is portfolio interest have changed for obligations issued after March 18, 2012. Before March 19, 2012, portfolio interest included interest on certain registered and nonregistered (bearer) bonds. For obligations issued after March 18, 2012, portfolio interest does not include interest paid on debt that is not in registered form. An obligation is in registered form if: (i) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new holder; (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book entry system maintained by the issuer or its agent; or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be transferred both by surrender and reissuance and through a book entry system. An obligation that would otherwise be considered to be in registered form is not considered to be in registered form as of a particular time if it can be converted at any time in the future into an obligation that is not in registered form.
  3. US real property interest. Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2011. The provision was extended through 2013. The special rules that apply to distributions from a QIE attributable to the gain from the sale or exchange of a US real property interest will continue to apply to any distribution from an RIC.
  4. Interest-related dividends and short-term capital gain dividends received from mutual funds. The exemption from withholding on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company was scheduled to expire at the end of 2011. These provisions were extended through 2013.
  5. Partnership withholding rate on effectively connected income. For 2013, the rate for withholding on noncorporate partners increased to 39.6 percent. The rate for corporate partners remains 35 percent.
  6. Personal exemption increased. For tax years beginning in 2013, the personal exemption amount increased to $3,800.

The United States, like other countries, is focused on off-shore tax activities. The new changes in Publications 515 and 519 are reminders of this focus.